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Small Business Succession Planning – Things to Consider

What is Succession Planning?

Simply put, succession planning is the process of transitioning key people within a business so that the business can continue to operate after the owner or key executives leave. Think of it as planning for the future of the business so that it can outlive the owners. This process involves a lot of planning as well as finding and training the right people to fill the main roles of the company. These people may be internal employees or outside hires, but when it comes to small businesses it’s usually the children of the owner.
This article is going to focus on transitioning a family business because I grew up with a family owned and operated restaurant. I will go over some mistakes to avoid and I have also included a bonus if you make it all the way to the end of the article – a succession planning checklist!

The Transition Starts Now

You generally don’t consider transitioning your business early on it in its life and your career but you should start as soon as possible. This could easily be a multi-year process with a lot of training and organizing. Or worse, you could pass away without having a chance to ease your successors into place. Having a written plan with action steps is best and should include key documents such as a buy/sell agreement.

The first step is to lay out your goals. These goals should address your future income needs, your future involvement in the business including your future ownership (will you continue to maintain an equity stake?), and your business’ values and legacy that you want to impart to your children or other future stakeholders.

Next you need to determine how to achieve these goals. A large part of this process is choosing who you want to be your successor(s). This can be a difficult decision, especially if you have multiple children. It’s your job to think like a business owner and decide who might be the most qualified. You could leave the business to multiple children but make sure they work well together because a business partnership could put a lot of stress on a family especially if there are differing opinions.

Now that you have found your successor, let the training begin. Have them shadow you on the job. If you do not have your job tasks written down in a manual this would be an excellent time to start documenting everything you do in a handbook. Your successor can write while you talk. I have found in many small businesses the day-to-day tasks are kept in only one place, the owner’s head. Get these written down now, because you may not be around to answer questions that come up later.

Selling the Company and Making the Transfer

There are many tools which can be used in transferring a business and will depend on your goals that were outlined above. You may need the help of a lawyer to carry these out properly.

Gifting: You can start gifting stock and possibly avoid some taxation. This is often used with other tools in transferring ownership.

Trusts: This can also be a good method for avoiding some tax associated with transferring a business. A trust can also be structured to provide income for the previous owners.

Outright Sale: When selling to a family member using this method you need to consider valuation issues and tax issues associated with an outright sale.

Buy/Sell Agreement: This is an agreement between shareholders and the company to purchase the shares of the owner in the event of a death or exit of the business’ owner. This type of agreement can be structured in different ways, again, depending on the goals of the company and its shareholders.

Family Partnership: This has been written about before on Epilawg and can be found here and states, “The Family Partnership can be part of a business succession plan for the transfer of interests in a family business. In addition, it allows an older generation to reduce the size of their estate while remaining active in the decision-making and management process.”

Avoid Mistakes in Succession Planning

Timing: Don’t be too focused on your work and ignore the importance of a succession plan. One of the biggest mistakes a small business owner can make is delaying this important part of any business. By delaying you are not able to accomplish your succession planning goals and will also delay the vital training process. This will make it very difficult for your children or other future owners to run the business effectively. Even if your children/successors are working in your business right now, they may not be exposed to everything that it takes to run the business. As you know being an owner you take on many different roles, all of which need to be explained and passed down.

Equality: Your children have different skills and interests. It might seem fair to give them an equal share but this might lead to disagreements and could hurt the business. Thinking about these issues ahead of time makes it possible to plan. You can work with your estate attorney to split up your estate so it is equitable to all of your children and still transfer the business to one child.

As promised you can find your small business planning checklist here! It will list out many things to think about as you go through your succession planning process. Just choose the Succession Planning Checklist from the drop-down menu.

About Epilawg

A collection of legal and non-legal insights for living your life and planning for the resolution of your life story. Topics cover business, estates, trusts, tax, real estate, finance and more provided by a variety of professionals in those areas. Learn more >